Internal determinants of foreign direct investment in South Africa.

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Abstract

Foreign Direct Investment (FDI) is a powerful driver of economic growth and
development, particularly in the developing world. FDI can lead to greater
efficiencies in the local economy through a number of different channels such as the
transfer of technology, increase in competition, and job creation. This dissertation
discusses the costs and benefits derived from FDI as well as examining various
complementary issues to FDI, such as the relevance of fiscal incentives and the
varying effects of different modes of entry.
This study further analyses the determinants of FDI into South Africa for the period
1961-2009, through the use of two different econometric techniques – time series
and panel data analysis. The results from the time series analysis concur largely with
previous studies, finding market size, exchange rate, macroeconomic (in)stability
and infrastructure to all be statistically significant determinants of FDI inflows into
South Africa.
South Africa underwent a major political and economic change in 1994 with the end
of Apartheid. This fundamental shift in the economy has also affected the
determinants of FDI into the country. To this end a panel data analysis was
conducted between 1994 and 2009, the results of which are more suitable for
forecasting. This analysis found similar results to the time series analysis, although
the relative importance of the determinants varies somewhat, and two additional
variables – education and labour productivity – were also found to be statistically
significant determinants in the panel data analysis.
The dissertation concludes by discussing the policy implications that derive from the
findings of the econometric analysis and offers some policy advice in terms of
attracting greater FDI into South Africa, based on the findings of this analysis.